It’s been said that the four most dangerous words in investing are “this time it’s different”. But I think the opposite is every bit as dangerous: “things will have to revert to the norm”...
The thought struck me as I read a response to Monday’s Right Side. On Monday, I laid out ten reasons why the Footsie is doggedly pursuing its northward march. One reader reasoned that the main stimulus seems to be coming directly from the planners, and when that goes, so goes the fundamental support for stocks.
“Interest rates have to rise sometime!”
Aaah, that old chestnut. Things have got to revert to the norm... The key question is, when?
Do you short the market? Do you just sit it out? How much will you make if you’re right? How much will you lose if you’re wrong?
Fortune favours the bold... nah!
I’m not convinced by everything JM Keynes put down on paper. But I’m pretty certain his maxim “markets can remain irrational longer than you can remain solvent” is bang on the money.
The fact is, being right isn’t actually that useful. Not if you’ve got your timing wrong! Things may well change, but not before you’ve lost a ton of money and end up looking the fool.
Here’s a chart of the FTSE 100 over the last 15 years. I want to use it to explain exactly what I mean...
There are two very visible peaks. First, the dotcom-induced millennium push, then the '00s peak; itself brought about by the intervention of the central planners in trying to fix the dotcom bust. That was the planners' trial run in fixing equity markets.
Of course today, we see the real thing. The third peak is in progress right now... the result of the planners’ unprecedented stimulus.
The point is, just look at how long these rises and falls take to play out. Do you really say “hey, this market is plain wrong – I’m sitting this one out!”
During the '90s, a great fund manager did exactly that. Tony Dye, who became known as 'Dr Doom', was convinced the markets were getting way ahead of themselves. He took the bold action of removing client funds from the market.
Of course, he was right... in the end. But his timing was spectacularly wrong. He lost his job, his reputation and undoubtedly, a lot of client money.
During the dotcom bubble, even the judgement of the great Warren Buffett was called into question as he doggedly stuck to his guns and sat out the technology stock frenzy. For sure, he was right in the end, but I tell you, those years of underperforming the markets led many to question whether the old sage had lost it.
And then, it was the '00s run-up. How many sat out the great bull run that practically doubled the value of the market?
I mean, these upswings take years to play out.
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Can you take that much pain?
Taking bold steps can be traumatising. Being right can be deeply unpleasant when the market keeps plodding on without you.
And of course, you have to consider that the naysayers could be wrong. What if the central planners can keep meddling, keeping interest rates down and liquidity up? What if the assumption that “things have revert to the norm” is plain wrong?
For heaven’s sake, interest rates have been held in check for over four years now. Who’s to say the policy won’t go on for another five or ten years?
Do you have what it takes to sit this out? Do you really want to ‘fight the Fed’?
Some investors are shorting this market upswing. Well, maybe they’re right.... but I tell you, being wrong could be very costly. The 2003 market upswing took five years to play out. Today, we’re four years into the upswing. Will this one last the same amount of time? Will it go on for longer?
All I know is that getting on the wrong side of the move can be horrible. “Things must change... rates must rise... the liquidity bubble must pop... stocks must fall” is all well and good; but do you have the tenacity to sit out another year, two or even five years of bull market action?
How to play it
The truth is, I’ve been sceptical about this market upswing for quite a while. So the way I chose to play it was by being underweight equities - I didn’t dump stocks, I just trimmed them back. To my mind, sitting out wasn’t an option. I am no Dr Doom!
And seeing the tenacity of the central planners, recently I even upped my equity weighting.
I’m not saying you should do the same. I just urge you to reflect on how long markets can move in the ‘wrong’ direction. Diversification is the key to playing the investment game... and not making rash moves.
For instance, by putting some money into emerging-market equities, I’ve been able to insure myself against the weak pound at the same time as I up the equity stakes. Investing far away means you need good information, of course… but that’s where Lars Henriksson comes in. He’s reliable. Click here for more from Lars.
They say that fortune favours the bold. Hmm... the bold also have a habit of dying young. I am not trying to push readers one way or the other. I just think it’s worth considering the fact that getting back to normal could take years – and that’s a long time to be
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